Some stylised facts about the exchange rate behaviour of Central European currencies

Jan Vejmělek

doi:10.18267/j.aop.525

Abstract

The paper investigates developments of exchange rate time series of Central European currencies and tries to find evidence of some stylised facts. Statistical methods and an econometric approach to the univariate time series modelling of high-frequency data, i.e., daily, are used. The main conclusions are as follows: (1) All the CE nominal exchange time series are not stationary: nevertheless, stationarity of all the return time series was confirmed. (2) Volatility clustering was proven and the GARCH modelling approach was successfully applied, including asymmetric modelling of volatility. (3) The more flexible an exchange rate regime is, the more volatile the respective currency. This is true for both nominal and real exchange rates. While nominal volatility is lower than real volatility in a system of fixed or less flexible exchange rates, the opposite is true for flexible systems: exchange rate volatility is higher in nominal terms than in real terms.

Highlights

Financial markets behave in such a way that the time series of prices of financial market instruments often demonstrate some behaviour or characteristics that can be generalised for a similar type of univariate or multivariate time series
While nominal volatility is lower than real volatility in a system of fixed or less flexible exchange rates, the opposite is true for flexible systems: exchange rate volatility is higher in nominal terms than in real terms
We found that all the CE nominal exchange time series are not stationary, which is a confirmation of the convergence process in all the respective economies

Summary

Introduction

Financial markets behave in such a way that the time series of prices (or yields) of financial market instruments often demonstrate some behaviour or characteristics that can be generalised for a similar type of univariate or multivariate time series. Observations or empirical results that are generally accepted as being true are called stylised facts. We will focus on some stylised facts of the exchange rate time series behaviour in this article. Stylised facts of exchange rate development are mainly researched for major currencies.. We will focus on the behaviour of Central European currencies (CE currencies) in this paper. The typical behaviour of the Czech, Polish, Hungarian and Slovak currencies quoted against the euro, which is the reference currency for all the Central European countries, and other indicators linked to exchange rates will be investigated. The structure of the paper is as follows: after a brief description of the data used (Chapter 1), we will focus on the distribution characteristics of exchange rate returns (Chapter 2).

Description of data used

Normal versus fatter-tail distribution of exchange rate returns

Heteroskedasticity modelling of CE exchange rates movements

Volatility of CE exchange rate movements versus exchange rate systems

Conclusion